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Affordability Of Housing And Rentals In Australia

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Question:

Discuss about the Affordability of Housing and Rentals in Australia.
 
 

Answer:

Introduction:

The first article “RBA governor Philip Lowe only sees one way to solve Australia's housing affordability problem” by Scutt (2017) is concerned about the issue of housing unaffordability owing to the hiking property prices. The clearing of the housing market is non achievable since the supply is not adjusting to meet the rising demand.  He noted that housing demand and supply are the underlying driver on the property prices. The article is trying to choose the best policy to improve affordability. These policies may either be aimed to deter demand or to stimulate the housing supply. On the demand side, the article is explaining the possible factors stimulating demand and on the supply side it’s explaining the factors hindering supply.

The second article “Sydney squeeze: Is rent control the answer to the housing affordability crisis?” by Hoh (2017) is concerned with the issues being faced by tenants from renting houses. The rental price are very high and unaffordable; this is especially near busy business places like large cities. The private landlords are charging monopoly prices to their tenants because of lack of a price control. The government with an aim to improve affordability sets up a cap on the rental prices; a maximum price limit that tenants should pay. However, Hoh is questioning the effectiveness of a rental price cap and is supporting the strategy of raising the rental supplies instead.

One of the factors behind the rising property prices is the persistent of low mortgage interest (OECD, 2010). At very low interest, the low cost of servicing the borrowed money stimulates demand (Wang and Tumbarello, 2010). This has resulted from the presence of a loose monetary policy.  In order to solve this problem the government is limiting the interest of mortgage.

Another factor is the inelasticity of supply. Irrespective of the increased growth in demand, the supply of housing has not expanded (Jones, White and Dunse, 2012). There is underinvestment in this sector. This deficiency in supply creates a shortage. According to Hoh (2017), the government is building more affordable homes.

 

The last factor is the population growth rate. Australian economy is experiencing a fast population growth rate mainly from immigrants. This has raised the demand for housing and subsequently caused prices to go up. The policy makers are restricting the number of immigrants into the economy and encouraging the Australian residents to use birth controls.

The supply curve is steeply sloped meaning that it’s inelastic and thus unresponsive. Assuming an equilibrium point P*Q* with an inelastic supply and demand D1, a small increase in demand causes a very big increase in price. The demand increase to Q1 causes a price rise to P1 and demand curve shifts to D2 creating a new equilibrium P1Q1. The suppliers are benefiting from the high prices but the consumers are being disadvantaged.

The starting point is at unaffordable equilibrium price Pe and quantity Qe; the equilibrium is point e. The consumer surplus at this equilibrium is Pe,f,e and producer surplus Pe,d,e. since the aim is to improve affordability, the rental cap price is below Pe (McGee, 2015); this is price Pc. Lower price Pc discourages supply but encourages demand. At the cap price, the quantity supplied falls to Qc but demand rises to Q1. The result is a shortage Q1 – Qc. Consumer surplus increase to f,a,c,Pc indicating an improvement in welfare, and producer surplus fell to Pc,d,c. a deadweight loss results of a,e,c. The effectiveness of the rental cap is reduced by the notion that producers may charge a black market price Pb at the rental cap quantity Qc.

The alternative mechanisms for rationing rental stock when there is a shortage and there is a price limit include

On the first-come-first-serve basis those who seek the rental first are the ones who benefit. On the preferred consumers’ alternative, the government specified the income group that is eligible for renting the capped rentals (Riley, 2015). This ensures that high income group doesn’t take advantage; this is meant for the low-income group.

The quality of rental stock fall when the rental cap is imposed. This is because the revenue to the suppliers is reduced and thus there incentive to improve the premises or even introduce new innovations is overlooked. The suppliers are not willing to incur costs that would eat to the small revenue that they raise. In the long run, the stocks will create externalities to the renters as they will expose them to various dangers. McGee (2015) projected a future mass destruction of rentals due to lack of repair.

 

References

Hoh, A. (2017). Sydney squeeze: Is rent control the answer to Sydney's housing affordability crisis? [Online] ABC News. Available at: https://www.abc.net.au/news/2017-03-21/sydney-squeeze-affordable-housing-rent-control-options/8370364 [Accessed 26 Apr. 2017].

Jones, C., White, M., and Dunse, N. (2012). The challenges of the housing economy: an international perspective. Hoboken, N.J., Wiley-Blackwell.

McGee, M. (2015). New rule - old problem; rent ceiling. [Online] OSC IB Blogs. Available at: https://blogs.osc-ib.com/2015/12/ib-student-blogs/new-rule-old-problem-rent-ceiling/ [Accessed 26 Apr. 2017].

OECD (2010). OECD Economic Surveys. Paris, Organization for Economic Co-operation and Development

Riley, G. (2015). Government Intervention - Maximum Prices. [Online] tutor2u. Available at: https://www.tutor2u.net/economics/reference/government-intervention-maximum-prices [Accessed 26 Apr. 2017].

Scutt, D. (2017). RBA governor Philip Lowe only sees one way to solve Australia's housing affordability problem. [Online] Business Insider Australia. Available at: https://www.businessinsider.com.au/lowe-housing-affordability-2017-4 [Accessed 26 Apr. 2017].

Wang, S. and Tumbarello, P. (2010). What Drives House Prices in Australia? A+L4584 Cross-Country Approach. 1st ed. International Monetary Fund.

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